Synthetic crypto assets offer vast potential to shake up the crypto and traditional financial markets, but what’s behind the current growth?
Amid all the excitement of crypto’s biggest bull run in history, some assets have been outperforming even the current high-performing market. In particular, Synthetix (SNX) has been on an epic tear, leading the growth of the whole niche.
The news of a Coinbase listing in December helped account for some of this. However, at the time of writing, SNX has increased by over 225% since mid-December, currently trading above $16.7 and cementing its position as one of the best-performing tokens in the ongoing rally.
Beyond the Coinbase effect, the main reason for the increase in SNX’s price is the genuine demand for what Synthetix has to offer — namely digital, synthetic assets. So, why all the excitement about these instruments, and what are they used for?
A brief history of synthetic assets
Like many other elements of the cryptocurrency markets, synthetics arrived from the traditional financial sector. Synthetics are used to simulate particular instruments while altering some key characteristics. This allows investors to gain exposure to underlying assets without necessarily having to hold them.
In the cryptocurrency space, tokens are a digital synthetic representation of any other asset, including those in the real world, such as stocks, commodities or fiat currencies. Crypto synthetics can also be used to gain exposure to cryptocurrencies and tokens. A simple example could be some of the “wrapped” assets used in Ethereum’s DeFi applications.
Wrapped Bitcoin (WBTC) has succeeded over recent months, which is a testament to the appetite for such assets, having risen from a market cap of around $1.1 billion in September to $4.7 billion at the peak of Bitcoin’s recent rally above $40,000. The recent release of a synthetic version of Monero could help would-be investors get around the exchange clampdown on privacy coins. It offers investors exposure to Monero (XMR) without having to navigate the ongoing delistings, while also providing an opportunity to stake Wrapped Monero (WXMR) in the various Ethereum-based decentralized finance applications.
Synthetix — First-mover advantage
Synthetix benefits from being the first to market with a decentralized exchange that also allows users to mint synthetic assets, known as Synths, using cryptocurrencies as collateral. The platform operates SNX as its native token. Holders can use SNX as collateral to mint Synths and earn a share of fees paid by Synthetix DEX users. Therefore, the SNX token offers real utility, as it incentivizes users to create Synths on the platform and create further value for the token itself.
Over the last three months, Synthetix has been undergoing significant growth, rising from around $500 million locked in late October to over $2.3 billion at the time of writing, according to DeFi Pulse.
Although there are Synths that allow traders to speculate on the price of non-crypto assets, such as oil, it’s evident that the vast majority of users are taking advantage of Synthetix to gain access to synthetic USD and crypto assets, with sUSD, sEther and sBitcoin being the most popular on the platform. They account for over 75% of the total market cap of all synths, according to the Synthetix stats page.
The sUSD Synth alone is around 50% of the total Synth market cap, indicating that DeFi users continue to have an appetite for stable currencies for trading. However, sUSD is also the most liquid Synth, which is tradable on centralized exchanges including Binance and KuCoin, as well as on decentralized exchanges Curve and Balancer.
The most popular is the sUSD/sETH pair on the Synthetix Exchange, which currently has around $10 million in daily volume. Despite this, the number of traders using the platform is quite low, with an average of around 130 in the last 30 days. This indicates that liquidity is highly concentrated.